John Smith is analyzing a project that plans to invest $20 million in Galaxy Place, a

new

interactive arcade space. Galaxy Place will take two years to build, and the

expenditures will be

incurred over

the two years

as follows:

Today $10 million

One year from now $5 million

Two years from now $5 million

Once the arcade is built, John expects

the arcade

to attract teenagers in record

numbers, resulting in revenues of $10 million

per

year for the next 10 years after the

arcade is built. The arcade will cost $4 million

per

year to operate, including

annual

depreciation of $1 million.

John plans to build the arcade

on land that he bought three years ago for $1.2

million. If John does NOT take on this project,

John plans

to lease

the land out

for

$200,000

per

year before

taxes. At the end of the 10 years of

operating, it is assumed that the arcade can be sold for $11 million.

The project is subject to tax at a rate of

40%, and the weighted average cost of capital

is 15%. Ignore the tax shield effects of capital cost all

allowance (CCA) but assume that depreciation can be deducted for tax purposes.

Required:

a)

Calculate

the present value

of the

initial investment

for the project.

b)

Calculate

the annual after-tax operating cash flows for the arcade.

c)

Calculate

the net present value (NPV) of the project.

d)

Assume the arcade will operate for 20 years and the salvage value is $5 million.

Calculate the NPV of the project.